Fortunately, a good, sustainable plan can put you on the path toward a more realistic and comfortable retirement. Here's how to get there, step by step:
Step 1: Establish age-based goals
Many variables and unknowns are associated with retirement goals. These include things like your current and desired lifestyle, financial obligations, interest-generating potential, and future expenses and plans. All those factors can make retirement goals seem like a moving target. And here's the thing: They kind of are!
That's why you should set your goals based on what you know now. That starts with your age. Everyone's situation is unique, of course, but age-based benchmarks tied to your salary can give you a focus you can adapt and improve as the years go by.
For example, by the time you turn 30, it's good to have the equivalent of one year's salary saved for retirement. So, if you make $55,000, that's $55,000 stowed away, give or take. The older you are, the more aggressive those goalposts get:
- By age 45, you should have 2 1/2 to 4 times your salary in retirement savings.
- By age 55, you should have 5 to 8 times your salary.
- By age 65, you should have 8 1/2 to 14 times your salary.
If all that sounds too ambitious, or you feel like you've already fallen behind, it's okay—and common. Work with a financial professional to help get your goals on track. They can help you assess your savings options, establish a plan, and align your retirement goals with other financial priorities, like paying down student debt or funding education so your kids won't have loans of their own.
Step 2: Consider outside forces
Of course, outside economic forces can also play a big role in your savings milestones.
One example is inflation, or the rising cost of living (and falling value of money) over time. Inflation can affect your "purchasing power" just as interest does: When you consider rising consumer prices, a dollar saved today doesn't equal a dollar saved tomorrow. And even though the inflation rate hasn't been very high lately, don't take it for granted. An inflation calculator can help you understand how changes in prices affect your savings.
Another outside force is taxes—that is, how much you might owe on retirement account contributions, withdrawals and earnings. For example, you fund "traditional" IRAs and 401(k), 403(b) and 457 accounts with pretax (or tax-deductible) dollars—but you'll owe income tax based on your tax bracket when you withdraw your money. By contrast, you fund Roth IRAs and workplace plans with after-tax dollars, but withdrawals are tax free (after age 59½). Other plans may have different tax implications.
To account for these variables, work with a financial planner or tax advisor. They can help you understand how inflation and taxation can affect your savings now and in the future.
Step 3: Consider other income, expenses—and risk tolerance
Once you've thought through the tax and inflation implications, consider the full picture of your income, spending and how comfortable you are with investment risk:
Income-wise, it's not just about what's in your retirement account: Chances are you'll also get income from Social Security. And you may have pensions, inheritances or even assets like home equity if you hope to downsize after the kids move out.
Spending-wise, it's not just about keeping yourself fed, clothed and housed after you retire. You also should consider expenses like debts (particularly if you have a mortgage you haven't paid off), travel goals or health needs like long-term care.
Risk-wise, it's a good idea to think about your risk tolerance. This means your willingness (be honest!) to accept investment volatility over a specific time horizon (how long until you'll need your money). For example, you may be willing to buy higher-risk investments (like stocks) in exchange for better potential returns—but only if you won't need the money for many years to come.
These considerations can influence your goals—and maybe even accelerate (or delay) your retirement timeline. To crunch your specific numbers and help you answer the question, "How much do I need to retire?" check out Prudential's retirement calculator.